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International Trade September 9, 2005
Ms. Gloria Blue Re: Comments on USTR's Annual Review of China's WTO Compliance Dear Ms. Blue: The Society of the Plastics Industry, Inc. (SPI) hereby responds to the Trade Policy Staff Committee's request for comments on China's compliance with its WTO obligations. See 70 Fed. Reg. 44714 (Aug. 3, 2005). As discussed below, SPI members have identified numerous concerns about China's compliance record. They include: (1) China's undervalued currency, (2) rampant intellectual property rights violations, (3) remaining high tariffs on plastics industry products, (4) lack of transparent customs procedures, (5) de facto discriminatory enforcement of tax policies, (6) implementation of standards and technical regulations, and (7) sanitary and phytosanitary measures under China's Food Hygiene Law. Introduction SPI is the only plastics industry trade association representing companies that operate in all segments of the supply chain - processors, manufacturers of machinery, molds, and raw materials (resins/polymers). Our more than 1,000 members participate in an industry that last year, shipped goods worth $340 billion worldwide and employed 1.3 million workers in 20,000 facilities in every state. SPI members range from large multinational corporations to small and medium-sized companies, many of which are family-owned businesses, all playing a vital role in the delivery of myriad plastics products that enhance every aspect of our lives. We welcome the opportunity to share the progress and difficulties SPI members have experienced because China is a significant market for the U.S. plastics industry. In 2002, plastics industry exports to China increased by 20% from 2001 levels. In 2003, China became the third largest export market for plastics industry goods, with exports valued at $1.32 billion. This export growth continued last year-- U.S. plastics exports increased by 43% to $1.9 billion. China's market reforms adopted under the parameters of the WTO helped stimulate these large increases in U.S. plastics exports. Its rapid domestic growth has spurred robust demand for plastics industry products, creating opportunities for U.S. plastics companies to supply China's vast market. For this reason, SPI members are generally optimistic about the progress China has made in recent years to comply with its WTO obligations. It has reduced tariffs, relaxed restrictions on trading rights, improved its legal framework to protect intellectual property rights, and generally supported a more transparent trading system - areas where SPI members have observed concrete progress in recent years. Moreover, China has been responsive to U.S. priorities in certain matters. Despite some progress in recent years, however, numerous areas exist where we believe China must significantly improve its compliance record. These are critical areas for U.S. plastics companies, because, as demonstrated above, China is and will remain a critical market for plastics industry goods. China's Undervalued Currency SPI members repeatedly cite China's failure to adopt a market-based exchange rate system as a serious concern associated with its WTO membership. Article XV:4 of the General Agreement on Tariffs and Trade (GATT) obligates China to ensure that its exchange-rate system does not "frustrate the intent" of principles embodied in the WTO framework. Since joining the WTO, China has ignored this obligation and fixed the yuan at 8.28:1.0 against the U.S. dollar, instead of permitting market forces to determine the yuan's value. It is now well-documented that this non-market-based exchange-rate system has substantially undervalued the yuan by 40% or more. China's recent yuan revaluation was a welcomed and long overdue initial step to inject market-based principles in its exchange-rate system. However, the 2.1% change falls woefully short of the substantial revaluation needed to remedy the imbalance in U.S.-China trade created by the distorted yuan-dollar relationship that China has maintained for over a decade. It is well-established that this distortion has made U.S. exports more expensive and China's imports cheaper than they otherwise would be if market forces determined China's yuan value. Thus, China's intervention in the exchange-rate system confers a competitive advantage on Chinese exporters, thereby "frustrating" the spirit and intent of longstanding WTO principles. China's substantially undervalued yuan is a major concern for SPI members because the U.S. plastics industry has borne a heavy burden from the distorted yuan-dollar relationship. The industry observed a $3.3 billion trade deficit with China in 2004. Only 5.5% of U.S. plastics shipments went to China, but China accounted for 19.5% of plastics imports. Plastics processors most acutely feel the impact of the artificially low yuan value. Last year, the industry observed a $5 billion deficit with China in plastics product trade. China took in only 3.1% of U.S. plastics product exports, but accounted for 29.5% of plastics product imports. Indeed, Chinese plastics product imports have grown by more than 15% every year for the past five years. Several SPI members that compete with Chinese plastics product imports have conducted their own cost-price studies. These studies have confirmed the impact of the undervalued yuan, which continues to confer a competitive advantage on Chinese exporters. As Jon McClure, a SPI member and President and CEO of ISO Poly Films, Inc., attests: "I've compared my costs to a hypothetical Chinese film producer's costs. And based on average selling prices of imported Chinese film sold in the U.S. market, it is absolutely clear that the low yuan value is the only way China can compete head to head with us in films. It's not the cheap labor or about being competitive. It's the exchange rate." The initial step by China this summer to revalue the yuan by 2.1% is simply not sufficient to bring its exchange-rate system in compliance with WTO and IMF principles. We, therefore, urge the Administration to continue to press China to substantially revalue the yuan to comply with its international obligations. We are mindful of Secretary Snow's stated intent to cite China for currency manipulation if it has not done so by the October due date of Treasury's semi-annual report to Congress. SPI will join the efforts of the National Association of Manufacturers and other industry groups to secure this citation in Treasury's report because, for our members, China's longstanding non-compliance in this area must be rectified in the near term. Rampant Intellectual Property Rights Violations Massive intellectual property rights violations continue to mar China's WTO compliance record. Direct experience with the acceptance of piracy, counterfeiting, and trademark infringements as a way of doing business in China is the second most frequently cited concern by SPI members. Although extremely difficult to track down, several SPI members possess evidence of egregious infringements in China. Some notable examples include:
As these examples make abundantly clear, the widespread illegal counterfeiting and pirating of U.S. goods is not limited to pharmaceuticals, software, and electronic products. The criminal conduct extends to myriad plastics industry products, even those used for medicinal and health purposes. Needless to say, the counterfeiting of medical devices poses a dangerous threat to the public safety and health of Chinese citizens as well as citizens around the world where counterfeiters export their illegal products. Since joining the WTO, China has adopted many legal reforms to build a framework for protecting intellectual property rights. The Chinese government has also responded to the United States' calls for more effective enforcement mechanisms, such as a judicial interpretation which should pave the way to apply criminal penalties against infringers under Chinese law. The problem, however, lies in effective enforcement of this legal framework. Without a more aggressive attack on illegal counterfeiters by the Chinese government, there is no deterrent to curb the widespread abuses that plague U.S. plastics companies, particularly small and medium-sized ones, seeking access to the Chinese market. The examples discussed above demonstrate how China's lack of effective enforcement of intellectual property rights is a de facto trade barrier that hinders plastics exports to China. The Chinese plastics market offers great opportunities for U.S. plastics manufacturers, who are constantly innovating and producing superior quality products to serve a variety of end-use markets. However, many SPI members have either terminated business discussions or are weary of even attempting to sell their products in China for fear of having their proprietary designs and trademarks infringed upon. Even attempts to register patents, trademarks, and copyrights do not provide adequate safeguards against violations because registration does not guarantee that an infringer will be caught, much less subject to stringent penalties. China is obligated under Article 41 of the TRIPs Agreement to ensure that its legal framework for protecting intellectual property rights "permit[s] effective action against any act of infringement of intellectual property rights . . . including expeditious remedies to prevent infringement and remedies which constitute a deterrent to further infringements." (emphasis added). As is evident from the examples above (as well as the host of other violations that other U.S. companies have observed), China has been sorely deficient in satisfying this deterrent element of its TRIPs obligations. While we are pleased that the Administration has made China's record in this area a top priority, the time is ripe for more urgent action. U.S. manufacturers, particularly small and medium-sized companies, cannot risk the losses associated with infringements on their intellectual property rights. China's failure to effectively enforce intellectual property rights has become a trade barrier that must be dismantled in short order. Remaining High Tariffs on Plastics Industry Products Upon joining the WTO in 2001, China committed to tariff reductions of about 10%. Although China has implemented many of these tariff cuts, its overall tariff levels remain high, particularly on plastics imports. For example, as a signatory to the WTO Chemical Tariff Harmonization Agreement, China agreed to reduce tariffs on plastics resins. China currently imposes tariffs of 9.7% on most plastics resins even though the Agreement calls for tariffs cuts to 6.5%. China does not intend to reduce these resin tariffs to 6.5% until 2008. Tariffs on polytetrafluoroethylene resin (PTFE), a major input for the production of cookware and other consumer products, remains high at 10%. In addition, on a host of plastics products, such as tubes, pipes, bath items, bags, kitchenware, and construction materials, China imposes a 10% tariff. Extrusion and blow molding machines enter at a 5% tariff rate, and plastic molds at tariffs ranging from 5-10%. When combined with the 17% VAT, U.S. exporters outlay significant funds to gain access to China's market. However, these same plastics products enter the U.S. market at tariff levels no higher than 6.5%. Tariffs on imports of machinery and molds are even lower, with most categories entering at 3.1%. The disparate U.S. and Chinese tariff levels provides a stark illustration of the relatively less restricted access that Chinese plastics imports enjoy in the U.S. market - a competitive benefit exacerbated by the undervalued yuan. SPI certainly commends China for the substantial tariff cuts it made when joining the WTO in 2001. However, we strongly believe that further tariff reductions are warranted to help expand U.S. plastics exports to China. Given its competitive position in the worldwide plastics market, China is fully capable of opening its market by cutting tariffs to levels comparable to other major plastics markets such as the United States and the EU. To this end, SPI urges USTR to press for further tariff reductions in the context of the non-agricultural market access negotiations in the ongoing Doha Round. While we recognize that substantial liberalization of agricultural trade is a top priority, deep cuts in industrial trade barriers, particularly among WTO members such as China, are needed to obtain a good deal for U.S. manufacturers in the Doha negotiations. Lack of Transparent Customs Procedures Several SPI members have experienced problems with customs entry and clearance procedures for their goods. Long delays and unpublished regulations by Chinese customs authorities have blocked U.S. goods from entering the market. One SPI member almost lost a customer because customs officials impounded the U.S. company's goods citing absence of a certain certification. Neither the customer nor the Chinese customs agent, who was familiar with Chinese customs regulations, was aware of the certification requirements prior to the importation. Chinese customs authorities informed the parties involved that "ignorance" of the regulations was no excuse - even if there was no prior notice of it. Other SPI members have reported similar problems with clearing U.S. goods through customs. Apparently, these entry difficulties are so commonplace that a potential Chinese customer told one SPI member that even if the U.S. company could provide competitive pricing, the potential customer would purchase the goods domestically due to the burdens and delays associated with importing U.S. goods. These accounts demonstrate an opaque customs entry system that is implemented to the detriment of U.S. produced goods. Transparency of trade laws and regulations is a hallmark of WTO principles. China bears the burden of ensuring that its customs regulations and procedures are publicized so that exporters, importers, and other participants in international trade are fully aware of all entry requirements to avoid unnecessary delays. Notwithstanding the strides China has made to improve the transparency of its trade laws and regulations, work remains to be done in the customs area to become fully compliant with this WTO obligation. Chinese government officials should be made aware that, whether through administrative fiat or individual renegade customs officials, China's track record is deteriorating in this area. De Facto Discriminatory Tax Policies Although VAT is required for both domestic and imported goods, several SPI members have raised concerns that their Chinese counterparts avoid VAT payments, in some instances with the tacit approval of Chinese officials. For example, one SPI member observed fraudulent invoices crafted to substantially lower the required VAT payment on a competing product. To this member's knowledge, the Chinese company was not penalized for this evasive practice. SPI has received similar complaints from other members, noting that some local authorities encourage Chinese companies to engage in tax evasion to ensure that their products are competitive with imports. No SPI member has complained about an official policy of discriminatory tax treatment, such as the situation with VAT applied to semiconductors. However, anecdotal evidence that some Chinese officials may be turning a blind eye toward tax evasion by domestic manufacturers suggests a de facto form of discriminatory tax treatment. The fact that this practice appears to occur on a frequent basis warrants the Chinese government's close scrutiny. It is obviously quite difficult for U.S. companies to obtain documentary evidence of such practices. Nonetheless, we urge USTR to further investigate this issue, and if appropriate, raise the matter in future discussions with Chinese government officials. Whether the discrimination occurs as a matter of law or in practice, it is contrary to longstanding WTO principles. Enforcement of Standards and Technical Regulations Plastics industry goods are subject to a number of existing and proposed Chinese standards and technical regulations. Polymers and substances used to manufacture polymers must be listed on China's Chemical Inventory to be imported and sold in the Chinese market. Certain industry goods must contain the China Compulsory Certification (CCC) mark. Based on their end-use, many plastics products are also subject to registration and approval by regulatory agencies. For example, plastic medical devices and equipment must be registered with China's State Drug Administration (SDA) prior to marketing and sale in the Chinese market. Article 2 of the Agreement on Technical Barriers to Trade obligates China to ensure that its regulatory authorities do not apply its standards and regulations in a discriminatory manner and do not effectively construct "unnecessary obstacles to international trade." SPI members have experienced an uneven compliance record in this area. Some members have not experienced difficulties with obtaining the necessary registration and approvals for their products. Others have confronted burdensome delays and non-compliance with the regulatory body's internal rules and procedures governing the process. In some instances, the regulatory bodies have not complied with the published deadlines for approving the products and have provided no explanation for the delay. This creates a great deal of uncertainty for companies seeking the approvals because they often have constructed a business and marketing plan tied to the approval process. Given that these approvals are a prerequisite for entry into the Chinese market, Chinese regulatory bodies have the ability to substantially impede market access for products subject to their jurisdiction. SPI members are also particularly concerned about areas where Chinese authorities are promulgating new regulations. For example, plastics machinery and equipment goods are not currently subject to CCC mark requirements. However, SPI has learned from its members that Chinese authorities are considering the development of new safety standards for machinery and equipment to be eligible for the CCC mark. These new safety standards could be detrimental to U.S. machinery and equipment manufacturers. SPI equipment suppliers are not opposed to safety standards. In fact, U.S. produced machinery and equipment products comply with strict standards promulgated by the American National Standards Institute (ANSI). ANSI standards are internationally accepted and harmonized with other leading machinery producing markets, such as the EU. SPI members are concerned that China may establish new standards that will force U.S. plastics machinery manufacturers to either invest in costly technical changes to comply with any Chinese national standards or forego selling their products to the Chinese market. Chinese authorities' position that only ISO or IEC standards are acceptable non-Chinese standards for electronic products heightens our concern about the acceptance of ANSI machine safety standards. China is the third largest export market for U.S. plastics machinery and equipment. The prospect that new safety standards on plastics machinery may impede market access for these goods warrants serious attention. It is particularly troubling if China's safety standards are based upon an overly narrow interpretation of the TBT Agreement. Before issuing a final decision in this area, China should provide industry with a meaningful opportunity to comment on any proposals. SPI members stand ready to consult with the appropriate Chinese standard-setting bodies to discuss ways to achieve China's safety goals without undue commercial costs on manufacturers. We welcome USTR's assistance in facilitating these discussions. Sanitary and Phytosanitary Measures SPI members have raised concern about China's implementation of regulations governing food-contact materials. China regulates food and food packaging materials under its Food ygiene Law. In general, the law establishes hygienic standards and regulations for food containers, packaging materials, utensils, and equipment. Of the nearly 500 hygienic standards that apply to food and related components, only approximately 60 relate to food packaging and food-contact materials. Hygienic standards exist for several polymeric materials commonly used to produce food-contact materials, including polyethylene, polypropylene, polystyrene, etc. Hygienic standards also exist for materials used to manufacture these polymers. These standards list substances that are approved for use as additives in food containers and packaging materials. However, China's hygienic standards for food-contact materials do not contain hundreds of materials currently permitted for use in food-contact materials in the United States and Europe. It appears that these materials would be treated as "new" materials, which must be added to the hygienic lists prior to marketing or sale in the Chinese market. Under the Food Hygiene Law regulations, "new" materials may be added to the list by petitioning the Ministry of Health. However, the regulations do not set forth the specific procedures that must be followed to obtain new approvals. Thus, SPI members that produce/supply these food-contact materials confront a serious dilemma. If China's regulatory regime is implemented as codified, they are not in compliance if they market and sell food-contact materials that are approved by the U.S. Food and Drug Administration in the Chinese market. On the other hand, there is no clear process for adding "new" materials to China's existing hygienic standards. Many U.S. companies have strict regulatory compliance policies in this area, and the current system in China is frustrating for those companies that seek to market their materials in China and fully comply with its laws and regulations. SPI members have raised their concerns directly with the Chinese regulatory authorities, who appear responsive to these important issues. They have urged the regulatory authorities to accept as valid those materials that are already accepted by the FDA (consistent with the principles embodies in the Sanitary and Phytosanitary Agreement.) Indeed, establishing a comprehensive regulatory system for food-contact materials would be an enormous undertaking for the Chinese government. It is also unnecessary for China to undertake this effort when the FDA and other competent bodies in Europe and Canada have established the safety of these materials using sound scientific procedures. While Chinese health officials have appeared receptive to our proposal, the ultimate outcome of these discussions remains unclear. SPI members will continue to engage Chinese authorities on this matter, and we hope that USTR will also urge China to permit the use of those food-contact materials that currently have suitable regulatory status in the United States, Europe, and Canada. This would fully protect Chinese consumers and also allow U.S. companies to comply with China's food safety regime. * * * * We hope the TPSC staff finds this information helpful as it prepares the annual report to Congress on China's WTO compliance. If you need additional information or have questions, please do not hesitate to contact the undersigned. Respectfully submitted, Karen Bland Toliver, Esq. Senior Director, International Trade and Industry Statistics (202) 974-5333 More
Public Policy: Environment
. Worker Safety . Transportation
. Codes and Standards . Food,
Drug,and Cosmetic Packaging . International
Trade
. Other Issues
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 © Copyright 2003 The Society of the Plastics Industry.
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